SARFAESI Act 2002: Enforcement of Security Interest Without Court Intervention

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002 empowers banks and specified financial institutions to enforce security interests in case of loan defaults without requiring court intervention. This was enacted to address the growing NPA (Non-Performing Asset) problem and speed up credit recovery.

Who Can Use SARFAESI?

Secured creditors eligible to use SARFAESI include:

• Scheduled commercial banks
• Small Finance Banks and Payments Banks
• NBFCs (with asset size above Rs.100 crore as notified)
• National Housing Bank and Housing Finance Companies
• Debenture trustees for secured debentures
• Asset Reconstruction Companies (ARCs)

What Assets Can Be Enforced?

SARFAESI applies to security interests created over:

• Immovable property (by way of mortgage)
• Movable property (by way of hypothecation or pledge)
• Financial assets including book debts, receivables

Agriculture land is explicitly excluded from SARFAESI enforcement.

NPA Classification

SARFAESI can be invoked when an account is classified as NPA (Non-Performing Asset):

• Term loan: principal/interest overdue for more than 90 days
• Overdraft/Cash Credit: out of order for 90 days
• The account must have a "security interest" (mortgage, pledge, hypothecation) registered with CERSAI

SARFAESI Process: Step by Step

1. Demand Notice — Section 13(2): Bank issues notice to borrower/guarantor demanding repayment within 60 days. Must contain details of dues and security to be enforced.
2. Borrower's Reply: Borrower can make representation within 60 days. Bank must consider objections and communicate reasons if rejected.
3. Possession Notice — Section 13(4): If default continues after 60 days, bank takes possession of secured asset. Two modes:
   • Actual possession (movables, vacant properties)
   • Symbolic possession (occupied properties — appointing a receiver/manager)
4. Possession Notice Publication: Notice published in two newspapers; possession notice affixed at the property
5. Sale/Lease/Assign: After 30 days from possession notice, bank may sell, lease, or assign the security interest
6. Appropriation of Proceeds: Sale proceeds applied first to costs, then to secured debt

Methods of Sale Under SARFAESI

Before public auction, 30 days notice must be given with reserve price (determined by bank-approved valuer). If first auction fails, bank may reduce reserve price and re-auction after 30 days.

Borrower's Rights Under SARFAESI

• Right of Redemption (Section 13(8)): Borrower can redeem the property by paying all dues before auction is concluded
• Right to Representation: During 60-day notice period, make written representation to bank
• Appeal to DRT (Section 17): Within 30 days of possession, appeal to Debt Recovery Tribunal
• Right to receive surplus: If sale proceeds exceed dues, surplus returned to borrower

Appeal to DRT

Aggrieved borrowers or guarantors may appeal to the Debt Recovery Tribunal (DRT) under Section 17 within 45 days of possession notice. The DRT may:

• Stay the SARFAESI proceedings on deposit of pre-deposit amount (typically 50% of dues)
• Direct bank to restore possession if action was wrongful
• Award damages for wrongful possession

Further appeal to Debt Recovery Appellate Tribunal (DRAT) within 30 days of DRT order, and thereafter to High Court.

CERSAI: Central Registry

The Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) maintains a database of security interests. All banks must register mortgages and security interests with CERSAI. Buyers of properties through SARFAESI auction should verify CERSAI records to ensure clear title.

Comparison with IBC